A new bill in Congress would change the classification of cryptocurrencies, no longer making them securities.
One of the pitfalls facing the cryptocurrency industry in the United States is how coins are classified by the federal government. The Securities and Exchange Commission (SEC) considers all coins, except for Bitcoin and Ethereum, to be securities, even if said coins have a utility function. This has crippled the crypto ecosystem within the United States, but it appears that some relief may be coming. A new bill has been introduced in Congress to exclude cryptocurrencies from the 70-year-old definition of securities.
Promising Bill for Cryptocurrencies
The new bill that seeks to redefine virtual currencies is called the Token Taxonomy Act, and it is sponsored by a Republican and Democrat. The sponsors are Representatives Warren Davidson (R-Ohio) and Darren Soto (D-Florida).
The Token Taxonomy Act legally defines a “digital token” and specifies that current securities laws do not apply to virtual currencies once they become a fully functioning network. The bill also instructs the IRS to adjust their taxation of cryptocurrencies, creates a de minimis exemption for gains made by selling or exchanging crypto, and creates a tax exemption for the conversion of one cryptocurrency for another.
It should be noted that the U.S. government uses the Howey Test, which originated in a 1946 U.S. Supreme Court decision, that specifies that any transactions that qualify as an “investment contract” are legally considered securities. The SEC maintains that an investment contract is in place when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
Needless to say, those knowledgeable about cryptocurrency say that the rules should be more nuanced for virtual currencies. They point out that these currencies are also a blockchain platform that can be built upon and that they can directly be traded between peers without the need for a third party.
Kristin Smith, the head of the Blockchain Association, notes:
These decentralized networks don’t fit neatly within the existing regulatory structure. This is a step forward in finding the right way to regulate them.
Will It Pass?
As with almost every piece of legislation, there are those that are for it as well as those against it. The two representatives are definitely for it. Warren Davidson held a roundtable on the subject a few months back in Washington, D.C., which helped push the formation of this legislation. Of the bill itself, Davidson says:
In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market. Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space.
However, the head of the SEC, Jay Clayton, is not a fan of changing the classification of cryptocurrencies. He told Congress at a hearing earlier this year that every ICO he saw “is a security.” He says only Bitcoin and Ether are not as they are truly decentralized and are, thus, commodities, which puts them under the purview of the Commodities Futures Trade Commission (CFTC).
Sadly, the bill will not be voted on this year. The last day for Congress to vote on it was yesterday, so the bill will have to re-introduced next year, at which time the Democrats will have control of the House. Hopefully, 2019 will see the bill passed, bringing greater regulatory clarity to virtual currencies in the United States and lifting the onerous “securities” burden off the shoulders of crypto.
Do you think such a bill will pass next year and become law? Let us know in the comments below.
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